Japan’s Stock Market Surges 25%

Japanese stocks have soared by an impressive 25% this year, outperforming equities in the U.S. and other developed markets, while bucking the trend of global central banks tightening financial conditions. The first half of 2023 saw Japanese stocks return a remarkable 24% in local currency, compared to a 17% rise in the U.S.

However, questions arise about whether the Bank of Japan will follow suit with other central banks in tightening its monetary policies. Investors worldwide are now eagerly awaiting the outcome of the upcoming Bank of Japan meeting, as they seek hints about the sustainability of the country’s impressive stock market rally.

Amid the robust performance of Japanese stocks, billionaire investor Warren Buffett’s Berkshire Hathaway has boosted its stake in several Japanese trading companies, providing a “stamp of approval” for other investors. Additionally, there has been a surge in investments in Japan-focused exchange-traded funds (ETFs), which grew from $18.7 billion to $25.5 billion in assets under management from the end of 2022 to June 2023. Such bullishness is fueled by investors chasing returns, further strengthening the market’s momentum.

Beyond fund flows and Buffett’s endorsement, Japan’s stock market might also benefit from a “multidecade hangover” stemming from the legendary asset price bubble of the 1980s. Many Japanese corporations have remained cautious, holding substantial excess cash and unproductive assets on their balance sheets. However, recent directives from the Tokyo Stock Exchange indicate a push for companies to enhance their stock prices, potentially leading to increased dividends and share buybacks.

As the Bank of Japan’s meeting approaches, investors will closely watch for any changes to its current policies. The bank has been implementing “yield curve control” to maintain low government bond yields and keep credit flowing. Unlike other central banks, the Bank of Japan is expected to maintain its loose policy to sustain inflation. However, potential challenges such as Japan’s aging population and high government debt levels could pose risks to the continued upward trajectory of the stock market.